Updated: February, 2021
Solar energy is one of the cleanest types of renewable energy, but the solar panels and equipment necessary for an implementation of a home solar system are very expensive. Systems installed in prime locations will eventually pay for themselves, but most homeowners do not have the cash upfront to get the system installed. There are several options you can turn to for financing a home solar project and getting your system up and running.
Methods for Financing Solar Panels and Equipment
Leasing solar equipment: Just as you can go out and lease a car, now there are many companies that allow you to lease equipment for a home solar project. The lease is either for a fixed monthly cost regardless of how much energy the panels produce or for a fixed cost per unit of electricity produced, known as a power purchase agreement. Either way, there is no money down, which is ideal for homeowners who are on a tight budget. The downside to leasing is that you never own the equipment, and the lease is typically for 20 years, which could complicate selling the house at a later date.
Home equity borrowing or cash-out refinancing: You can take out a home equity loan for any purpose, provided you have good credit, steady income, and your mortgage balance and home equity borrowing don't exceed 80% of your home value. Another option, which is especially attractive if your current mortgage has a higher rate than today's market rates, is to use a cash-out refinance to get a new mortgage. The new mortgage needs to be of a sufficient amount to pay off your old mortgage and put cash in your hands to buy a solar system. The risk of both of these types of loans are that they use your home as collateral, and if you cannot pay, the lender could foreclose. The benefits often outweigh the risks, though, because it is a way to own a solar system at a low-interest rate while being able to deduct mortgage or home equity interest on your taxes.
Solar power loans: Some companies that sell or lease solar panels are also starting to offer loans specifically to purchase the equipment. These companies have arrangements in place with banks or other lenders, who may have been reluctant to lend directly to individuals when solar technology was first available and was more expensive. Keeping the loan separate from your home equity can be a good safety net, so you do not put your home at risk. Interest rates on these loans can still be relatively low because the equipment can be collateral on the loan.
Property Assessed Clean Energy (PACE): In some areas, you can borrow money from your state or local government to purchase a solar power system, and repay it through increased property tax bills for the next 10 to 20 years. The debt is secured by your property, but not your mortgage. If you sell your home, those increased taxes automatically transfer with the property to the new owner.
Government Subsidies for Home Solar Projects
In addition to the monthly costs, it is important to consider one-time perks that could help offset the cost of buying a home solar energy system. If you have several of these perks available to you and can take advantage of them, then buying may be a better option for you than leasing.
- Solar Investment Tax Credit: For 2020, the federal government offers a tax credit of 26% for the cost of a solar project to whoever owns the equipment. If you buy your system, even if you finance it with a loan, you can claim this tax credit. However, it is not a refundable credit. If you are not able to take the full credit for the year you purchased your system, you can carry over any remaining credit on your tax return the following year. If you are leasing your system, the company that owns it gets to claim the tax credit instead. The ITC for solar was extended by Congress in December 2015. It stood at 30% until 2019. In 2021, it is scheduled to be reduced to 22% and then it will expire starting in 2022 unless Congress renews it.
- State and Municipal Subsidies: Many states and cities also offer programs to incentivize the purchase of solar equipment. You will need to look into the specific programs available in your area to determine whether you qualify and how much money they can save you.
Deciding if Solar is Right for You
If you live in a location with high potential for solar power, installing solar panels through any of these methods will often save you money every month from the beginning of the installation. Plus, you will have the satisfaction of making solar power a larger part of the renewable energy picture in the United States.